MODEL OF DEMAND

1. Demand slide 1
MODEL OF DEMAND
It is an attempt to explain the amount
demanded of any good or service.
Demand Definition in Economics
The quantity of goods and services that
consumer or group of consumers are willing
and able to buy at any price over a given
period.

2. Demand slide 2
THE “STANDARD” MODEL OF
DEMAND
The DEPENDENT variable is the amount
demanded.
The INDEPENDENT variables are:
The good’s own price
The consumer’s money income
The prices of other goods
Preferences (tastes)

3. Demand slide 3
YOU COULD WRITE THE MODEL
THIS WAY:
The demand for Pizza
QD(Pizza) = D(Ptacos, Income, Pspaghetti,
tastes)

4. Demand slide 4
HOW CHANGES IN EACH
INDEPENDENT VARIABLE AFFECT THE
AMOUNT DEMANDED?

5. The Demand Schedule
The quantity of a commodity that people buy at any
one time depends on its price.
Higher price means less demand.
And other things being equal ,
Lower price means more demand
Demand slide 5

6. Demand slide 6
Price $ per apple
P
Quantity demanded
(million apple per year)
Q
A 5 9
B 4 10
C 3 12
D 2 15
E 1 20

7. Demand slide 7
THE DEMAND CURVE
The demand curve for any good shows the quantity
demanded at each price, holding constant all other
determinants of demand.
The DEPENDENT variable is the quantity
demanded.
The INDEPENDENT variable is the good’s own
price.

8. Demand slide 8
THE LAW OF DEMAND
A decrease in a good’s price will result in an
increase in the amount demanded, holding
constant all the other determinants of demand.
The Law of Demand says that demand curves
are negatively sloped.

9. Demand slide 9
A DEMAND CURVE
A demand curve must look like this, i.e.,
be negatively sloped.
own
price
quantity demanded
demand
Market for tacos

10. Demand slide 10
The demand curve means:
You pick a price, such a p0, and the demand curve shows how much is
demanded.
own
price
quantity demanded
demand
p0
Q0
Market for tacos

11. Demand slide 11
What if the price of Pizza were
less than p0?
How do you show the effect on
demand?
Go to hidden slide

12. Demand slide 13
AN IMPORTANT POINT
When drawing a demand curve notice
that:
- The axes are reversed from the usual
convention of putting the dependent (y)
variable on the vertical axis,
- and the independent (x) variable on the
horizontal axis.

13. Demand slide 14
Other factors affecting demand
The question here is how to show the effects
of changes in income, other goods’ prices,
and tastes on demand.

14. Demand slide 15
Suppose people want to buy more of a good when
incomes rise, holding constant all other factors
affecting demand, including the good’s own
price.
own price
quantity of Apple
demand @ I = $1000
Market for apple
How does this affect the
demand curve?
$1/can
Go to hidden slide

15. Demand slide 17
Normal and inferior goods defined
Normal good: When an increase in income
causes an increase in demand.
Inferior good: When an increase in income
causes a decrease in demand.

16. Demand slide 18
Pizza is a normal good.
own price
quantity
demand @ I = $1000
Market for pizza
What’s the effect on the demand
curve for pizza if income rises
to $2,000?
Go to hidden slide

17. Demand slide 20
Suppose instead that pizza was
an inferior good.
own price
quantity
demand @ I = $1000
Market for pizza
What’s the effect on the demand
curve for pizza if income rises
to $2,000?
Go to hidden slide

18. Demand slide 22
Substitutes defined
Substitutes:
Two goods are substitutes if an increase in the price
of one of them causes an increase in the demand
for the other.
Thus, an increase in the price of pizza would
increase the demand for spaghetti if the goods were
substitutes.

19. Demand slide 23
The graph shows the demand curve for
spaghetti when pizzas cost $10 each.
own price
quantity
demand @ pizza price of $10
Market for spaghetti
What’s the effect of an increase in
the price of pizza to $15?
Go to hidden slide

20. Demand slide 25
Complements defined
Complements:
Two goods are complements if an increase in the
price of one of them causes a decrease in the
demand for the other.
Thus, an increase in the price of pizza would
decrease the demand for Apple if the goods were
complements.

21. Demand slide 26
The graph shows the demand curve for
Apple when pizzas cost $10 each.
price of
Apple
quantity
demand @ pizza price of $10
Market for Apple
What is the effect on the
market for Apple of an
increase in the price of pizza
to $15?
Go to hidden slide

22. Demand slide 28
The graph shows the demand curve for
umbrellas on sunny days.
price of
umbrellas
quantity
demand on sunny days
Market for umbrellas
What’s the effect on demand of
it being a rainy day?
Go to hidden slide

23. Demand slide 30
DEMAND SUMMARY
Demand is a function of own-price, income, prices
of other goods, and tastes.
The demand curve shows demand as a function of a
good's own price, all else constant.
Changes in own-price show up as movements along
a demand curve.
Changes in income, prices of substitutes and
complements, and tastes show up as shifts in the
demand curve.